I’ve never necessarily been the biggest fan of stock ratings. In college it was suggested that a lot of companies that have analysts rating a stock also have brokerage arms that try and sell that stock to customers. That in and of itself isn’t the worst thing in the world because after-all, the brokers could simply rely on the analysts for buy or sell signals. There is a slight problem in that a stock will move on information and to the extent a broker has the information of a stock rating changing before the rest of the world, there could be some less than ethical dealings. The bigger problem lies with the potential for abuse on the investment side of things. This is the placement of bonds, IPO’s, secondary offerings, financial advise, M&A, etc. These same companies also have arms that deal with those types of relationships. Imagine trying to pitch your company’s Bond Placement credentials when your own analyst has a Sell rating on the company you are pitching to. This wouldn’t exactly ring out as something the potential buyers of the bond would want to see, nor would it put your best foot forward when pitching the business.
In the 90’s when I was in college we reviewed multiple stocks where these types of services overlapped and rarely found any “Sell” rating. The professor essentially pointed out that the ratings would have to be renamed in that a “Hold” would now be a strong sell and a “Strong Buy” would now be a do some additional research for a potential buy. If you saw any overlapping services you might want to evaluate the stock a little differently.
He was simply stating not to rely on analyst ratings as they were not really made for the consumer like us, but rather a marketing type of after-thought and we should really evaluate stocks ourselves to decide the right course of action.
This brings me to a couple of articles I saw today. This is now 15+ years after those classes and I am still seeing this type of activity. The activity however has expanded to “special” sites that offer insight into what a stock will do. I’ve always taken these with a grain of salt. Here is an example of what I am talking about.
The stock AMAG – a pharmaceutical company had its stock price go down substantially on Nov. 3, 2015. The information up to that point was buy buy buy. There was even an article about “Whispers” that the company was going to release earnings higher than analyst expectations. This article noted the historical beatings of earnings and the like and was published a few hours before the stock opened and the earnings were actually released. A similar article was published the night before with a similar story. I also looked at the “News” or “Information” articles from a couple days prior and all had buy ratings or reported on buy ratings. Those of course were just the sites that report on information. The actual “research” agency that issued the rating certainly has a lot of “free gifts” and other investor “tools” available on their site. They even have an online brokerage (convenient).
Bottomline – always ask yourself how a company makes money. Are they making money off advertising (not when all the advertisements are their own), their “research” (not when they “give it away”, or their “tools” (but it says its free)? If you want to play in the stock market, make sure you do your homework and don’t rely on free research as your sole reason for buying or selling.
Did I end up buying AMAG? Yes. Yes I did. I didn’t buy it on Nov. 2 though. I bought it after the earnings came out and the price was cut by 23%. For me and my risk preferences this was where I felt comfortable investing in the stock price. My market goals are going to be very different than anyone else, so it is certainly not a recommendation to do anything.